The Impact of Credit Risk and Capital Adequacy on Profitability: The Mediating Role of Net Interest Margin

Abstract

Bank profitability is essential for maintaining financial-sector stability and supporting sustainable economic intermediation. This study examines the effects of credit risk and capital adequacy on profitability and investigates the mediating role of net interest margin in conventional commercial banks listed on the Indonesia Stock Exchange during 2022–2024. A quantitative causal-associative design was employed using secondary financial data. The population consisted of 42 banks, from which 34 banks were selected through purposive sampling, producing 102 observations. Data were analyzed using path analysis with LISREL 10.20. The results show that Non-Performing Loans (NPL) significantly affect Return on Assets (ROA), whereas the Capital Adequacy Ratio (CAR) has no significant direct effect on ROA. NPL does not significantly affect Net Interest Margin (NIM), while CAR has a significant effect on NIM. Furthermore, NIM significantly and positively affects ROA. The mediation analysis indicates that NIM does not mediate the relationship between NPL and ROA but significantly mediates the relationship between CAR and ROA. These findings demonstrate that profitability is primarily associated with credit quality and intermediation performance, while capital adequacy contributes indirectly through its ability to strengthen net interest income generation and improve banking profitability. These results provide practical implications for effective bank financial management.